Occupational Background and Investment Performance of Venture Capitalists, a paper co-authored by our school’s Professor Zhang Xueyong and Dr. Zhang Lin from Beijing Technology and Business University, was published in the 2019 12th Issue of Journal of Management Sciences in China.
By looking into the occupational background of venture capitalists, this paper compares the investment performance of the ones with a financial background and those with an industrial background. Statistics show that during 2001-2017, venture capitalists with the above two backgrounds accounted for around 78% of the total in China.
Venture capital (VC) is considered an important means of financing for startups. China began to guide and promote the development of venture capital in the 1980s. The scale of VC funds started to grow exponentially until the establishment of the Small and Medium-sized Enterprise Board and the ChiNext. However, under the influence of the macroeconomic situation, the scale of China’s private equity funds has begun to decline since 2017. In the long run, under the double tests of the “liquidity squeeze” and the “scarcity of high-yield premium assets”, the VC industry will experience the survival of the fittest with a market reshuffling soon to come. How to dig up more successful venture capitalists is not only an important subject of the academic circle, but also an issue about which limited partnerships and entrepreneurs are concerned.
By drawing on sample data about VC projects, individual venture capitalists and invested enterprises, this paper finds that in contrast with venture capitalists with an industrial background, those with a financial background are more successful, represented by a higher IPO exit rate of investment projects. Moreover, the latter are more aggressive in terms of investment style, as they are more inclined to make independent, cross-region and large-sum investments. The paper finds that the rationale behind this phenomenon is that venture capitalists with a financial background can make use of their occupational background to better support the invested enterprises. For example, they can help the invested enterprises to obtain the next round of VC financing faster, and to employ underwriters with better reputation during the IPO process with a relatively low underpricing rate.
Existing literature tries to answer “what kind of VC can be counted as good VC?” by mainly centering on the differences of VC institutions. However, studies show that human capital is the key to explaining the overall performance of an organization. Given the crucial role of professional experience in the formation of human capital, this paper looks into the heterogeneity of occupational backgrounds of venture capitalists at VC institutions, which constitutes a significant complement to existing literature.
